Statistics for Business and Economics (14e, Metric Version)

Statistics for
Business and Economics (14e)
Metric Version
Anderson, Sweeney, Williams, Camm, Cochran, Fry, Ohlmann
© 2020 Cengage Learning

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 Statistics for Business and Economics (14e, Metric Version)

Chapter 5: Discrete Probability Distributions

5.1 - Random Variables
5.2 - Developing Discrete Probability
Distributions
5.3 - Expected Value and Variance
5.4 - Bivariate Distributions, Covariance, and
Financial Portfolios
5.5 - Binomial Probability Distribution
5.6 - Poisson Probability Distribution
5.7 - Hypergeometric Probability Distribution

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 Statistics for Business and Economics (14e, Metric Version)

Random Variables (1 of 2)
• A random variable is a numerical description of the outcome of an experiment.
• A discrete random variable may assume either a finite number of values or an
infinite sequence of values.
• A continuous random variable may assume any numerical value in an interval or
collection of intervals.

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 Statistics for Business and Economics (14e, Metric Version)

Discrete Random Variable with a Finite Number of Values

Example: JSL Appliances
Let x = number of TVs sold at the store in one day, where x can take on 5 values
(0, 1, 2, 3, 4)

We can count the TVs sold, and there is a finite upper limit on the number that
might be sold (which is the number of TVs in stock).

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 Statistics for Business and Economics (14e, Metric Version)

Discrete Random Variable with an Infinite Number of Values

Example: JSL Appliances
Let x = number of customers arriving in one day, where x can take on the values
0, 1, 2, . . .

We can count the customers arriving, but there is no finite upper limit on the
number that might arrive.

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 Statistics for Business and Economics (14e, Metric Version)

Examples of discrete random variables

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 Statistics for Business and Economics (14e, Metric Version)

Examples of continuous random variables

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 Statistics for Business and Economics (14e, Metric Version)

Practice: Types of random variables (E.6, p.227)

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 Statistics for Business and Economics (14e, Metric Version)

Discrete Probability Distributions (1 of 7)

• The probability distribution for a random variable describes how probabilities
are distributed over the values of the random variable.
• We can describe a discrete probability distribution with a table, graph, or
formula.
Types of discrete probability distributions:
• First type: uses the rules of assigning probabilities to experimental outcomes to
determine probabilities for each value of the random variable.
• Second type: uses a special mathematical formula to compute the probabilities
for each value of the random variable.

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 Statistics for Business and Economics (14e, Metric Version)

Discrete Probability Distributions (2 of 7)

• The probability distribution is defined by a probability function, denoted by f(x),
that provides the probability for each value of the random variable.
• The required conditions for a discrete probability function are:

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 Statistics for Business and Economics (14e, Metric Version)

Discrete Probability Distributions (3 of 7)

• There are three methods for assigning probabilities to random variables:
classical method, subjective method, and relative frequency method.
• The use of the relative frequency method to develop discrete probability
distributions leads to what is called an empirical discrete distribution.

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 Statistics for Business and Economics (14e, Metric Version)

Discrete Probability Distributions (4 of 7)

Example: JSL Appliances
Using past data on TV sales, a tabular representation of the probability distribution for
sales was developed.

Number
Units Sold of Days 𝑥 𝑓(𝑥)
0 80 0 .40 = 80/200
1 50 1 0.25
2 40 2 0.20
3 10 3 0.05
4 20 4 0.10
200 1.00
. .

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 Statistics for Business and Economics (14e, Metric Version)

Discrete Probability Distributions (5 of 7)

Example: JSL Appliances

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 Statistics for Business and Economics (14e, Metric Version)

Discrete Probability Distributions (6 of 7)

• In addition to tables and graphs, a formula that gives the probability function,
f(x), for every value of x is often used to describe the probability distributions.
• Several discrete probability distributions specified by formulas are the discrete-
uniform, binomial, Poisson, and hypergeometric distributions.

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 Statistics for Business and Economics (14e, Metric Version)

Discrete Probability Distributions (7 of 7)

• The discrete uniform probability distribution is the simplest example of a
discrete probability distribution given by a formula.
• The discrete uniform probability function is

where: n = the number of values the

random variable may assume
• The values of the random variable are equally likely.

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 Statistics for Business and Economics (14e, Metric Version)

Practice: Develop a discrete probability distribution (E.9, p.231)

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 Statistics for Business and Economics (14e, Metric Version)

Expected Value (1 of 2)
• The expected value, or mean, of a random variable is a measure of its central
location.

• The expected value is a weighted average of the values the random variable
may assume. The weights are the probabilities.
• The expected value does not have to be a value the random variable can
assume.

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 Statistics for Business and Economics (14e, Metric Version)

Variance and Standard Deviation

• The variance summarizes the variability in the values of a random variable.

• The variance is a weighted average of the squared deviations of a random

variable from its mean. The weights are the probabilities.
• The standard deviation, σ, is defined as the positive square root of the variance.

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 Statistics for Business and Economics (14e, Metric Version)

Expected Value (2 of 2)
Example: JSL Appliances
x f(x) xf(x)
0 .40 .00
1 .25 .25
2 .20 .40
3 .05 .15
4 .10 .40

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 Statistics for Business and Economics (14e, Metric Version)

Variance
Example: JSL Appliances

X x– μ (x – μ )2 f(x) (x– μ )2 f(x)

0 – 1.2 1.44 .40 .576
1 – 0.2 0.04 .25 .010
2 0.8 0.64 .20 .128
3 1.8 3.24 .05 .162
4 2.8 7.84 .10 .784
Variance of daily sales =
σ 2 = 1.660
Standard deviation of daily sales = 1.2884 TVs

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 Statistics for Business and Economics (14e, Metric Version)

Practice: Calculate expected value (E.19, p.236)

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 Statistics for Business and Economics (14e, Metric Version)

Bivariate Distributions (1 of 3)
A bivariate probability distribution is a probability distribution involving two random
variables.
For example, here are the daily sales at the DiCarlo Motors automobile dealership in
Saratoga, New York, and DiCarlo, another dealership in Geneva, New York. The table
shows the number of cars sold at each of the dealerships over a 300-day period.

Geneva 0 1 2 3 4 5 Total
Dealership

0 21 30 24 9 2 0 86

1 21 36 33 18 2 1 111

2 9 42 9 12 3 2 77

3 3 9 6 3 5 0 26

Total 54 117 72 42 12 3 300

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 Statistics for Business and Economics (14e, Metric Version)

Bivariate Distributions (2 of 3)
Let us define x = number of cars sold at the Geneva dealership and y = the number
of cars sold at the Saratoga dealership. We can now divide all of the frequencies by
the number of observations (300) to develop a bivariate empirical discrete
probability distribution for automobile sales at the two DiCarlo dealerships.

Geneva 0 1 2 3 4 5 Total
Dealership
0 .0700 .1000 .0800 .0300 .0067 .0000 .2867
1 .0700 .1200 .1100 .0600 .0067 .0033 .3700
2 .0300 .1400 .0300 .0400 .0100 .0067 .2567
3 .0100 .0300 .0200 .0100 .0167 .0000 .0867
Total .18 .39 .24 .14 .04 .01 1.0000

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 Statistics for Business and Economics (14e, Metric Version)

Bivariate Distributions (3 of 3)
The table below shows the expected value for the mean total sales and the standard deviation of total sales for these
two dealerships. We can define s = x + y as total sales for DiCarlo Motors.

s f(s) sf(s) s – E(s) (s – E(s))2 (s – E(s))2 f(s)

0 .0700 .0000 –2.6433 6.9872 .4891
1 .1700 .1700 –1.6433 2.7005 .4591
2 .2300 .4600 –.6433 .4139 .0952
3 .2900 .8700 .3567 .1272 .0369
4 .1267 .5067 1.3567 1.8405 .2331
5 .0667 .3333 2.3567 5.5539 .3703
6 .0233 .1400 3.3567 11.2672 .2629
7 .0233 .1633 4.3567 18.9805 .4429
8 .0000 .0000 5.3567 28.6939 .0000
E(s) = 2.6433 A

Var(s) = 2.3895

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 Statistics for Business and Economics (14e, Metric Version)

Covariance
The covariance and/or correlation coefficient are good measures of association
between two random variables.

= (2.3895 – 0.8696 – 1.25)/2

= 0.1350

A covariance of .1350 indicates that daily sales at DiCarlo’s two dealerships have a
positive relationship.

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 Statistics for Business and Economics (14e, Metric Version)

Correlation
To get a better sense of the strength of the relationship, we can compute the
correlation coefficient.

The correlation coefficient of .1295 indicates there is a weak positive relationship

between the random variables representing daily sales at the two DiCarlo
dealerships. If the correlation coefficient had equaled zero, we would have
concluded that daily sales at the two dealerships were independent.

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 Statistics for Business and Economics (14e, Metric Version)

Binomial Probability Distribution (1 of 11)

Four Properties of a Binomial Experiment
1. The experiment consists of a sequence of n identical trials.
2. Two outcomes, success and failure, are possible on each trial.
3. The probability of a success, denoted by p, does not change from trial to trial.
(This is referred to as the stationarity assumption.)
4. The trials are independent.

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 Statistics for Business and Economics (14e, Metric Version)

Binomial Probability Distribution (2 of 11)

• Our interest is in the number of successes occurring in the n trials.
• Let x denote the number of successes occurring in the n trials.
• Binomial Probability Function:

where:
x = the number of successes
p = the probability of a success on one trial
n = the number of trials
f(x) = the probability of x successes in n trials
n! = n(n – 1)(n – 2) ….. (2)(1)
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 Statistics for Business and Economics (14e, Metric Version)

Binomial Probability Distribution (3 of 11)

Binomial Probability Function

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 Statistics for Business and Economics (14e, Metric Version)

Binomial Probability Distribution (4 of 11)

Example: Evans Electronics
Evans Electronics is concerned about a low retention rate for its employees. In
recent years, management has seen a turnover of 10% of the hourly employees
annually.
Thus, for any hourly employee chosen at random, management estimates a
probability of 0.1 that the person will not be with the company next year.
Choosing 3 hourly employees at random, what is the probability that 1 of them
will leave the company this year?

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 Statistics for Business and Economics (14e, Metric Version)

Binomial Probability Distribution (5 of 11)

Example: Evans Electronics
• The probability of the first employee leaving and the second and third
employees staying, denoted (S, F, F), is given by
p(1 – p)(1 – p)
• With a 0.10 probability of an employee leaving on any one trial, the probability
of an employee leaving on the first trial and not on the second and third trials is
given by
(0.10)(0.90)(0.90) = (0.10)(0.90)2 = 0.081

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 Statistics for Business and Economics (14e, Metric Version)

Binomial Probability Distribution (6 of 11)

Example: Evans Electronics
Two other experimental outcomes result in one success and two failures. The
probabilities for all three experimental outcomes involving one success follow.

Experimental Probability of
Outcome Experimental Outcome

(S, F, F) p(1 – p)(1 – p) = (.1)(.9)(.9) = .081

(F, S, F) (1 – p)p(1 – p) = (.9)(.1)(.9) = .081
(F, F, S) (1 – p)(1 – p)p = (.9)(.9)(.1) = .081
Total = .243

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 Statistics for Business and Economics (14e, Metric Version)

Binomial Probability Distribution (7 of 11)

Example: Evans Electronics
Using the probability function with p = 0.10, n = 3, and x = 1

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 Statistics for Business and Economics (14e, Metric Version)

Binomial Probability Distribution (8 of 11)

Example: Evans Electronics

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 Statistics for Business and Economics (14e, Metric Version)

Binomial Probabilities and Cumulative Probabilities

• Statisticians have developed tables that give probabilities and cumulative
probabilities for a binomial experiment random variable.
• These tables can be found in some statistics textbooks.
• With modern calculators and the capability of statistical software
packages, such tables are almost unnecessary.

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 Statistics for Business and Economics (14e, Metric Version)

Binomial Probability Distribution (9 of 11)

Using Tables of Binomial Probabilities

n x p = .05 p = .10 p = .15 p = .20 p = .25 p =.30 p = .35 p =.40 p =.45 p =.50

3 0 .8574 .7290 .6141 .5120 .4219 .3430 .2746 .2160 .1664 .1250

3 1 .1354 .2430 .3251 .3840 .4219 .4410 .4436 .4320 .4084 .3750

3 2 .0071 .0270 .0574 .0960 .1406 .1890 .2389 .2880 .3341 .3750

3 3 .0001 .0010 .0034 .0080 .0156 .0270 .0429 .0640 .0911 .1250

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 Statistics for Business and Economics (14e, Metric Version)

Binomial Probability Distribution (10 of 11)

• The expected value is:

• The variance is:

• The standard deviation is:

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 Statistics for Business and Economics (14e, Metric Version)

Binomial Probability Distribution (11 of 11)

Example: Evans Electronics
• The expected value is:

• The variance is:

• The standard deviation is:

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 Statistics for Business and Economics (14e, Metric Version)

Practice: Apply binomial probability (E.37, p.257)

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 Statistics for Business and Economics (14e, Metric Version)

Poisson Probability Distribution (1 of 6)

• A Poisson distributed random variable is often useful in estimating the number
of occurrences over a specified interval of time or space.
• It is a discrete random variable that may assume an infinite sequence of values
(x = 0, 1, 2, . . . ).
• Examples of Poisson distributed random variables:
• number of vehicles arriving at a toll booth in one hour

• Bell Labs used the Poisson distribution to model the arrival of phone calls.

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 Statistics for Business and Economics (14e, Metric Version)

Poisson Probability Distribution (2 of 6)

Two Properties of a Poisson Experiment
1. The probability of an occurrence is the same for any two intervals of equal length.
2. The occurrence or nonoccurrence in any interval is independent of the occurrence or
nonoccurrence in any other interval.
Poisson Probability Function:
where:
x = the number of occurrences in an interval
f(x) = the probability of x occurrences in an interval
μ = mean number of occurrences in an interval
e = 2.71828
x! = x(x – 1)(x – 2) . . . (2)(1)

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 Statistics for Business and Economics (14e, Metric Version)

Poisson Probability Distribution (3 of 6)

Poisson Probability Function
• Because there is no stated upper limit for the number of occurrences, the
probability function f(x) is applicable for values x = 0, 1, 2, … without limit.
• In practical applications, x will eventually become large enough so that f(x) is
approximately zero and the probability of any larger values of x becomes
negligible.
A property of the Poisson distribution is that the mean and variance are equal.

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 Statistics for Business and Economics (14e, Metric Version)

Poisson Probability Distribution: Example

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 Statistics for Business and Economics (14e, Metric Version)

Poisson Probability Distribution: Example

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 Statistics for Business and Economics (14e, Metric Version)

Hypergeometric Probability Distribution (Self-reading)

• The hypergeometric distribution is closely related to the binomial distribution.
• However, for the hypergeometric distribution:
• the trials are not independent, and
• the probability of success changes from trial to trial
• Hypergeometric Probability Function:

where: x = number of successes

n = number of trials
f(x) = probability of x successes in n trials
N = number of elements in the population
r = number of elements in the population labeled success

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 Statistics for Business and Economics (14e, Metric Version)

Hypergeometric Probability Distribution (2 of 7)

Hypergeometric Probability Function

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 Statistics for Business and Economics (14e, Metric Version)

Hypergeometric Probability Distribution (3 of 7)

• The probability function f(x) is usually applicable for values of x = 0, 1, 2, … n.

• If these two conditions do not hold for a value of x, the corresponding f(x)
equals 0.
Example: Neveready’s Batteries
Bob Neveready has removed two dead batteries from a flashlight and
inadvertently mingled them with the two good batteries he intended as
replacements. The four batteries look identical.
Bob now randomly selects two of the four batteries. What is the probability he
selects the two good batteries?

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 Statistics for Business and Economics (14e, Metric Version)

Hypergeometric Probability Distribution (4 of 7)

Example: Neveready’s Batteries
Using the probability function:

where: x = 2 = number of good batteries selected

n = 2 = number of batteries selected
N = 4 = number of batteries in total
r = 2 = number of good batteries in total

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 Statistics for Business and Economics (14e, Metric Version)

Hypergeometric Probability Distribution (5 of 7)

• Mean:

• Variance:

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 Statistics for Business and Economics (14e, Metric Version)

Hypergeometric Probability Distribution (6 of 7)

Example: Neveready’s Batteries
• Mean:

• Variance:

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 Statistics for Business and Economics (14e, Metric Version)

Hypergeometric Probability Distribution (7 of 7)

• Consider a hypergeometric distribution with n trials and let p = (r/N) denote
the probability of a success on the first trial.
• If the population size is large, the term (N – n)/(N – 1) approaches 1.
• The expected value and variance can be written E(x) = np and Var(x) = np(1 – p).
• Note that these are the expressions for the expected value and variance of a
binomial distribution.
• When the population size is large, a hypergeometric distribution can be
approximated by a binomial distribution with n trials and a probability of
success p = (r/N).

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 Statistics for Business and Economics (14e, Metric Version)

End of Chapter 5

Exercises:
E18, E27, E34,
E46, E63

© 2020 Cengage. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a 52
password-protected website or school-approved learning management system for classroom use.